@theMarket: Markets Are Waiting for Tax Reform
Stocks gyrated up and down this week as events in Washington competed with quarterly earnings results for investor's attention. Next week, we should find out more about both.
True to form, third-quarter earnings results have been in-line or better than expected. Over 70 percent of companies have "beat" earnings estimates, which is no surprise. Sales and earnings guidance have also been upbeat. For those unfortunate corporations who "missed" their targets on either the top or bottom line, retribution was swift and dramatic.
Some companies saw their stock price plummet 20 percent or more. And we are not just talking about penny stocks. Some mega-cap biotech names, for example, were taken to the woodshed and are still falling in price days later. On the other hand, some technology stocks, including the big momentum names such as the so-called "FANG" stocks saw their shares skyrocket on Friday as results more than beat analyst's estimates.
In the background, legislators in our nation's capital continued to march forward in their plans to cut and reform taxes. The House passed the Senate's version of the budget this week. That was a preliminary but necessary move that now allows tax reform to move forward through Congress with a simple majority vote.
No Democrats voted for the budget and some Republicans also abstained. The budget still passed, but by a slim majority. The political maneuvering behind the vote gave many investors the impression that next week's tax plan would not be as simple to pass as some might expect. However, traders are still giving Congress the benefit of the doubt, at least until next
Wednesday when the tax plan will be unveiled.
In the meantime, global markets are waiting with baited breath for President Trump to announce who will head the nation's central bank. Obviously, it is an important (some might say critical) job. Depending upon who you talk to, the front-runners are Jerome Powell, a Fed governor, who is thought to be in tune with current Fed policy under Chairwoman Janet Yellen.
John Taylor, a Stanford University economics professor, is the other candidate. He is a darling of conservative Republicans given his belief that the economy would generate stronger growth if the Fed would just get out of the way. However, Yellen is not out of the running just yet, since Trump said he still liked Yellen "a lot" for a second term. This week he said the decision was "very, very close."
The world's central bankers are on pins and needles as well, since much of monetary policy in the recent past has been a joint effort. This week, for example, Mario Draghi, the head of Europe's central bank, signaled that Europe would follow the lead of the U.S. central bank over the next year or so in throttling back its own stimulus of the European Union's economies.
Careful, steady, coordinated progress by central banks has been made in guiding the world's economies out of the financial crisis and Great Recession. Investors worry that a newcomer to the Fed chairmanship's job, especially one with different views, might rock the boat.
As for the markets, investors worry that at some point soon, the indexes will have to correct. There is an inescapable logic to that argument. But exactly when that will occur no one knows. In the meantime, stay invested.
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The Independent Investor: IRS Changes Tax Rules for Next Year
As politicians squabble over tax reform and cuts, the Internal Revenue Service (IRS) continues to do their job. New tax provisions for 2018 are out and some of them may be of interest to you.
Right now, there are seven marginal tax rates (soon to be three or four, if tax reform happens). Each tax bracket applies to a different income range. The highest tax rate (39.6 percent) will apply to all those who make $426,700, or $480,050 (married). The lowest rate, at 10 percent, would apply to those making $9,525 as an individual and $19,050, if married. You can review the other five brackets at your leisure by going to IRS.gov.
The IRS has also increased the standard deduction to $6,500 (for singles) and $13,000 for married couples. That amounts to a $150 increase, and double that, if filing jointly. Your personal exemption also increases by $100 from last year and now phases out for those earning $266,700-$389,200 and, if married, $320,000-$442,500.
Single taxpayers whose adjusted gross income exceeds $266,700 ($320,000 if married and filing jointly), will now be subject to a limit on certain itemized deductions such as property tax deductions. The controversial Alternative Minimum Tax (AMT), which prevents high income earners from dodging individual income taxes, has also changed. The AMT exemption amount has increased from $54,300 to $55,400 for singles and begins to phase out at $123,100.
For married couples, filing jointly, the new total is $86,200 from last year's $84,500.
The estate tax exclusion has also increased from $5.49 million to $5.6 million next year and the gift tax exclusion has increased by $1,000 to $15,000 a year. This will also affect 529 education accounts. The contribution limit is equal to the annual gift tax exclusion or a once in five-year contribution of $75,000 up from $70,000. In the tax-deferred savings area, another $500
was added to the allowable contribution amount. Those under age 50 can now contribute $18,500 a year to their 401(k), 403(b) and most 457 and federal thrift savings plans. However, for those over 50 years old, the catch-up contribution remains the same at $6,000. There are not changes to IRA contribution amounts for next year.
Of course, all or any of the above changes could fly right out the window next week when Republicans roll out their tax bill on Nov. 1. The GOP is caught between a rock and a hard place right now in deciding exactly what to cut and what to save. On the one hand, everyone wants to cut taxes, but the key is to do so without triggering a revolt in their own party or worse still, hurt middle-class taxpayers.
The proposed Republican budget will allow them to cut taxes by $1.5 trillion, but at the same time, their plans to cut taxes for individuals and corporations would amount to $5.5 trillion.
That's a $4 trillion shortfall that would have to be made up somehow. That's potentially more in spending cuts (or tax increases) than Congress has approved in the last 25 years.
Readers are probably aware of the areas that are under study. Sharply lowering pre-tax contributions to tax-deferred savings accounts and eliminating state and local tax deductions are two proposals that have caused uproar among politicians and voters alike. President Trump has warned legislatures to leave tax-deferred accounts alone.
We will all know more next week about the details. Needless to say, few if any Democrats intend to participate in this tax-reform effort. There is also some doubt as to whether any tax changes will occur before next year. As such, pay more attention to the IRS changes for now then what comes out of Washington.
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The Independent Investor: Taketh Care of Your Workers and They Will Taketh Care of You
Employers have had it all their own way for a decade or more. They have been able to freeze wages, cut benefits, force overtime and even deny vacations with impunity. Now, for many, it's time to pay the piper.
There is a saying, "what goes around, comes around," which means in this case that if you have spent years abusing your employees, the first company that offers them even the slightest uptick in benefits or salary will pick off your best workers in the time it takes to sign on the dotted line.
I can walk into a company and tell you within seconds whether or not its employees are well treated and happy. I'm sure you can, too. It shows on their faces, in their body language.
Spend a little time talking to them, and you can easily measure a worker's engagement, warmth and sense of shared purpose.
As unemployment declines, wages rise, and good workers become critical to your bottom line, you might want to consider that happy employees are critical to on-going productivity and talent retention. It has been shown over and over again that the better the corporate culture, the more a company will earn.
Don't just take my word for it. The 100 best companies to work for, according to Fortune Magazine, consistently outperform their competitors in sales and profits. They also add new employees at five times the rate of the national average. Fortune uses a "Trust Index" which measures employees' workplaces, including the honesty and quality of communication by managers, degree of support for employees' personal and professional lives, and the authenticity of relationships
While Fortune 500 companies, for the most part, strive to offer employee benefits such as retirement plans, healthcare insurance and the like, what really wows employees are the perks that many small and medium-sized businesses provide. Unlike the cookie-cutter benefits of mega-firms, these are a more tangible sub-set of service-oriented perks, each customized to address individual employees' everyday needs.
What, you may ask, are some examples of these kinds of perks? Take my company as an example. When I went into surgery for six hours for prostate cancer last year, the company's management team sat with my wife in the waiting room for the entire operation.
When our dog, Titus, required spine surgery this winter, both my wife and I were paid for the two days we were out caring for him. In addition to our 401(K) and health insurance, we also have a SEP IRA, dental insurance, unlimited time off, first class travel, company pets come to work (unpaid), unexpected bonuses, financial help for our parents in time of need, gifts, parties, presents etc. Naturally, everyone in the region wants to work for us.
But here's the point. None of us take off more than two-three weeks a year because we love it here. Prospective clients are struck by the attitude and team-work of our employees. This is no accident.
We have practically no turn over, despite constant offers from other firms.
The power of these perks cannot be understated. You may not be able to provide the level of personalized incentives that we enjoy here, but that does not mean your firm must settle for simply "me-too" kinds of incentives. Remember, aside from showing that you care, these efforts go right to the bottom line. And who among us would not want higher sales, profits and return on investment?
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@the Market: Markets Need a Time Out
The S&P 500 Index has gone up eight straight days. The other averages have done the same thing. That hasn't happened since 2013. It's time for a break.
It appears that stocks are in "melt-up" mode. That's a term we financial geeks use to describe an unrelenting rise in equity prices. Consider it an investor stampede where the fear of missing out on even higher prices creates a buying frenzy.
There are some fundamental reasons for the market's rise. The economy appears to be chugging along. Interest rates remain low while inflation continues to bump along the bottom. This Friday's payroll numbers were a disappointment to most. For the first time since 2010, the U.S. economy lost jobs in September. While the unemployment rate dropped to 4.2 percent, America also lost 33,000 jobs. It doesn't take rocket science to figure out why. Remember Hurricanes Harvey and Irma? Of course the nation lost jobs as whole businesses were flooded or blown away in sections of the country.
But at the same time, readers know that what I look at in each report is wage growth. That tells me how American workers are doing and where spending is going in the months ahead. And remember, consumer spending, which accounts for 70 percent of GDP, is key to the future health of the economy. Good news — wages jumped sharply higher last month, rising 0.5 percent over the August numbers and 2.9 percent over the prior year.
But the real reason investors are celebrating was the Republican-controlled House move to pass its 2018 budget resolution. In a 219-206 vote, the House of Representatives approved a budget resolution that sets up a process for shielding the GOP tax bill from a filibuster in the Senate. As such, it moves the president's tax reform proposal that much closer to passage this year. That gave Wall Street a new jolt of energy.
In addition, we are once again heading into earnings season starting next week. Remember that first-quarter earnings grew by 14 percent followed by a 9 percent gain in the second quarter. Third quarter earnings forecasts are all over the place: anywhere from a 4 percent gain to over 10 percent.
In my opinion, earnings are what really drive the stock market in the long term. The better they are, the higher the market will go. As such, earnings results could be a critical element in where the stock market goes from here.
If we do get double digit growth in earnings and at the same time it appears that tax reform will actually happen this year, then the markets will likely experience a "blow-off" surge that could be really spectacular. On the other hand, if earnings are just so-so, expect the market to regroup. Notice I didn't say fall precipitously.
The risk/reward is still with the bulls in my opinion. Even if earnings disappoint, a decline would simply be another excuse to buy the dip. So given the odds of a minor (5-7 percent pullback) and a blow-off rally that could extend for another few months, does it make sense to sell?
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The Independent Investor: Tackling Taxes
President Donald Trump introduced a flurry of tax proposals last week. Tax reform, as well as tax cuts, was included in his plan. Give him an "A" for effort in tackling something that no politician has dared to do since Reagan.
Naturally, depending upon your political views, critics will disparage his efforts, claiming it is yet another tax break for the rich. Others will approve of at least some of his suggestions. On the surface, his plan would significantly reduce the marginal tax rates, increase standard deductions, repeal personal exemptions, limit itemized deductions and let corporations and businesses expense new investment, but not deduct interest expense.
His proposal would also cut taxes at all income levels. The biggest benefits would accrue to those who make the most money. Analysts estimate that if his proposal were passed as is federal revenues would drop by $6.2 trillion over 10 years. If you include interest costs over that decade, the country's federal debt will rise by $7.2 trillion.
The president originally campaigned on a 15 percent corporate tax rate, but upped that number to a 20 percent tax rate. It appeared that dropping it by the original 15 percent would be a budget buster. Still, that is a hefty reduction from today's 35 percent (although few corporations actually pay that rate).
One great idea is to allow a 25 percent tax rate for pass-through businesses. That would allow entrepreneurs that own their own businesses to pay a 25 percent tax instead of their personal tax rate. There is some controversy over exactly what kind of businesses could benefit from the pass-through rate. But since small businesses account for the majority of employment in this country, anything that helps them helps all of us.
In addition, Trump's plan eliminates some business deductions; it also offers U.S.-owned businesses the chance to repatriate overseas assets at a one-time lower tax rate. The rumors are that the rate could be as low as 10 percent.
But readers are probably more interested in Trump's proposed tax brackets for personal income. The plan specifies three tax brackets with the lowest rate at 12 percent. That would actually be a slight bump up for the bottom bracket, which is now 10 percent. Those in the 15 percent tax bracket would probably benefit the most. The middle tax bracket would be 25 percent, but the exact incomes in this bracket have not been spelled out. Finally, the top rate would be 35 percent (versus the existing top rate of 39.6 percent).
In order to fulfill his promise that taxes for the wealthiest Americans not decrease, there may be a fourth bracket. If so, the details would be the job of the congressional tax committee.
The president wants to make sure that any reformed tax code is at least as progressive as the existing one. He also is insisting that the burden of taxes does not shift from wealthy, higher-income taxpayers to lower and middle-income Americans.
In an effort to protect those who will see their tax rise (from 10 percent to 12 percent), the standard deduction will increase to $12,000 from $6,350. That would double for a married couple. For those worried about the home-mortgage deduction, relax. Those, as well as charitable donations, are going to remain as is. Other deductions are up for grabs.
Finally, the elimination of state and local tax deductions has caused uproar in certain quarters. Most of the people who take advantage of these deductions are wealthy and happen to live in Democratic states. For example, about one-third of the beneficiaries live in New York, New Jersey and California. However, in an effort to be even-handed, Trump is pushing to eliminate the estate tax, which would benefit the wealthy.
Before you get into a funk over this, remember that what is proposed today will not be the same proposal Congress will legislate. We have no idea whether or when anything will pass both houses of Congress. My advice is to consider it a beginning, but expect the end result to be much different. And give the president some credit for trying.
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